Moody's to be target of antitrust investigation Justice Department probing bond ratings

Investing

March 28, 1996|By BLOOMBERG BUSINESS NEWS

NEW YORK -- Moody's Investors Service, one of Wall Street's two biggest bond rating companies, faces an antitrust investigation by the Justice Department over its bond ratings.

The probe centers on the markets for municipal, asset-backed and mortgage-backed securities, which total $2.8 trillion.

The department is investigating whether the practice of assigning unsolicited ratings on some debt is anticompetitive. The threat of a bad unsolicited rating can influence the decision of a bond issuer to give its business to one rating company over another.

"We're looking at the possibility of anticompetitive practices in the bond rating services industry," Gina Talamona, spokeswoman for the Justice Department's antitrust division, said yesterday. She declined to name the companies targeted by the investigation.

Moody's officials denied that the department was examining its use of ratings as a way of drumming up business. Standard & Poor's Corp. and Fitch Investors Service, two rival firms, said they also received requests for information.

"The Justice Department's inquiry is directed at another rating agency and we will, of course, cooperate," said Glenn Goldberg, a spokesman at S&P.

Bond rating companies are important because they help determine how much municipalities and consumers will pay to borrow. The ratings they assign help set prices in the $1.2 trillion municipal bond market and the $1.5 trillion market for mortgage-backed and asset-backed debt.

The investigation comes at a time when Moody's is fighting to retain its market share in the business of rating securities. Moody's share in rating some types of debt has dropped in the past few years with some competitors offering lower prices.

Total business in the municipal bond market has shrunk so much in the past two years that bond rating companies are earning a lot less in fees. Many municipalities borrowed at lower rates several years ago or are borrowing less as they cut spending.

Total sales are also shrinking in the mortgage bond market, and Moody's rivals are eating into its market share.

Moody's rated an estimated 42 percent of so-called private-label mortgage bonds last year, down from 76 percent in 1994 and 63 percent in 1993, according to Inside Mortgage Finance, a Bethesda-based newsletter.

Bond rating companies such as Moody's "are information brokers -- the rating is the information they provide," said Michael Coco of Advanta Corp., a Horsham, Pa.-based credit card company whose $9 billion of credit card-backed bonds are rated by Moody's and S&P.

Moody's ability to distribute that information gives them clout in the market, said Mr. Coco, even without explicit threats.

Pub Date: 3/28/96

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